$AAPL Carl Icahn's Letter to Apple CEO Tim Cook

Carl Icahn's Letter to Apple CEO Tim Cook -- WSJ Blog
Oct 24 at 10:06
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      Dear Tim:
      It was a pleasure meeting you for dinner at the end of September. When we
met, my affiliates and I owned 3,875,063 shares of Apple. As of this morning, we
owned 4,730,739 shares of Apple, an increase of 22% in position size, reflecting
our belief the market continues to dramatically undervalue the company, even
when taking into account the recent market appreciation, which in turn makes our
proposal unchanged with respect to a $150 Billion buyback. We were pleased to
hear at our dinner that you appreciated our input and that you would speak to us
again in three weeks to continue the dialogue. In anticipation of doing so soon,
we aim to reiterate in this letter the point of view already expressed to you
directly with the hope of effectively summarizing it for the company's board of
directors and our fellow shareholders.



      From our perspective, Apple is the world's greatest consumer product
innovator and has one of the strongest and most respected brand names in
history. We consider Apple to be our most compelling investment. I first
informed my followers on Twitter on August 13, 2013 of my "large position." I
also expressed to you my opinion that "a larger buyback should be done now." At
that time, we owned 3,448,663 shares and the stock price was $467. Since then
we have purchased an incremental 1,282,076 shares (bringing the total value of
my position to $2.5 Billion) and we currently intend to buy more.
      We want to be very clear that we could not be more supportive of you, the
existing management team, the culture at Apple and the innovative spirit it
engenders. The criticism we have as shareholders has nothing to do with your
management leadership or operational strategy. Our criticism relates to one
thing only: the size and timeframe of Apple's buyback program. It is obvious to
us that it should be much bigger and immediate.
      When we met, you agreed with us that the shares are undervalued. In our
view, irrational undervaluation as dramatic as this is often a short term
anomaly. The timing for a larger buyback is still ripe, but the opportunity will
not last forever. While the board's actions to date ($60 billion share
repurchase over three years) may seem like a large buyback, it is simply not
large enough given that Apple currently holds $147 billion of cash on its
balance sheet, and that it will generate $51 billion of EBIT next year (Wall
Street consensus forecast).
      The S&P 500 trades at roughly 14x forward earnings. After backing off net
cash, Apple trades at just 9x (not factoring into account that the company has a
significantly lower cash tax rate than the rate Wall Street analysts use). This
discount (cash adjusted) becomes even more compelling given our confidence that
Apple will grow earnings per share at a rate well in excess of the S&P 500 for
the foreseeable future. With such an enormous valuation gap and such a massive
amount of cash on the balance sheet, we find it difficult to imagine why the
board would not move more aggressively to buy back stock by immediately
announcing a $150 Billion tender offer (financed with debt or a mix of debt
and cash on the balance sheet).
      While this would certainly be unprecedented because of its size, it is
actually appropriate and manageable relative to the size and financial strength
of your company. Apple generates more than enough cash flow to service this
amount of debt and has $147 billion of cash in the bank. As we proposed at our
dinner, if the company decided to borrow the full $150 billion at a 3%
interest rate to commence a tender at $525 per share, the result would be an
immediate 33% boost to earnings per share, translating into a 33% increase in
the value of the shares, which significantly assumes no multiple expansion.
Longer term (in three years) if you execute this buyback as proposed, we expect
the share price to appreciate to $1,250, assuming the market rewards EBIT
growth of 7.5% per year with a more normal market multiple of 11x EBIT.
      It is our belief that a company's board has a responsibility to recognize
opportunities to increase shareholder value, which includes allocating capital
to execute large and well-timed buybacks. Apple's Board of Directors does not
currently include an individual with a track record as an investment
professional. In my opinion, any further delay in executing the buyback we
hereby propose will reflect this lack of expertise on the board. My firm's
success and my expertise as an investor would be difficult for anyone to argue.
Per my investment thesis, commencing this buyback immediately would ultimately
result in further stock appreciation of 140% for the shareholders who choose not
to sell into the proposed tender offer. Furthermore, to invalidate any possible
criticism that I would not stand by this thesis in terms of its long term
benefit to shareholders, I hereby agree to withhold my shares from the proposed
$150 Billion tender offer. There is nothing short term about my intentions
here.
      Sincerely,
      Carl Icahn
      Chairman, Icahn Enterprises (IEP)

  (This story has been posted on The Wall Street Journal Online's Digits
blog at http://blogs.wsj.com/digits/)
      By Steven Russolillo
      Billionaire investor Carl Icahn sent a letter to Apple Inc. CEO Tim Cook
pushing the company to implement a $150 billion stock buyback plan.
      Mr. Icahn says he boosted his stake in the iPhone and iPad maker to 4.7
million shares and said a bigger buyback could push the stock up to $1,250 in
three years.
      Shares recently fell 0.3% to $523.32.
      Mr. Icahn said he intends to continue boosting his investment in Apple.
      "There is nothing short term about my intentions here," Mr. Icahn says.
      Here's a copy of the letter in its entirety:
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